Both a home equity line of credit (HELOC), and a home equity loan (HELoan) allow you to borrow against the equity in your home—the difference between your home’s value and the amount you owe.
Both serve as an alternative to a refinance when you want to keep your current mortgage rate, and both may allow you to access more of your equity than a typical refinance will.
And funds from both can be used for anything from home repairs* to college tuition to consolidating high-interest debt. There are no restrictions on how you use the funds.
There are, however, key differences to remember.
HELOC
- Often starts with a lower interest rate, but it varies based on the prime rate and may increase
- Funds withdrawn as needed
- Starts with lower payments (sometimes interest only) before converting to fixed payments after a set period
- May have lower or no closing costs
HELoan
- May start with a higher interest rate but will remain the same for the life of the loan
- All funds provided at once
- Offers fixed payments through the term of the loan
- May have higher closing costs, from 2 – 5% of the loan amount
A risk for all home equity loan products is the potential for a drop in home values. While values typically trend higher over time, if housing prices drop before you sell or refinance you could end up owing more than your home’s value.
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